Future SIFI Landscape Will Change Industry Dynamics, NAIC Execs Say

The NAIC leadership is paying close attention to the insurance industry market and policyholder environment landscape in the wake of future systematically important financial institution (SIFI) designations, (a requirement of the Dodd Frank Consumer Protection Law) its leadership made clear today during an insurance regulatory conference here in Washington.

There could be “unintended consequences" of the SIFI designation, said NAIC president and Florida Insurance Commissioner Kevin McCarty.

“You are going to have winners and losers,” and there will be consequences on how management behaves if a company is too big to fail.

Currently, "there are less than 50 nonbank financial companies, including potential insurers, that would meet the Stage 1 thresholds," said John M. Huff, a nonvoting FSOC member representing insurance and Director of Missouri’s Department of Insurance, Financial Institutions & Professional Registration.

Huff did say there are a “finite group of people” who understand statutory accounting and that there are a “group of people trying to cram our sector into a [box] that does not work.” He said the hand the industry and regulators were dealt is “bank-centric.”

However, he said there is now a framework for a SIFI designation with the recently released criteria and insurance regulators can talk about their tools and what it is they do.

Both McCarty and NAIC CEO Dr. Therese (Terri) Vaughan agreed that once an insurer is identified as a SIFI, and "gone down that path,” the company needs to be told to “stop doing what got you on the SIFI list to begin with.”

A better-reasoned approach would be to look at what makes a company systemically risky, McCarty said in a talk with the press during a an international insurance issues conference sponsored by the NAIC here in Washington.

There is also “headline risk,” from news channels like CNN, according to Grier, who spoke as part of a panel on the SIFI issue before attendees if companies are portrayed inaccurately.

Grier said the focus needs to be on insurance company reserves, as cash flows and product designs come from capital models that come out of the framework of reserves and stochastic liabilities.

“Our argument is the best way to start (understanding insurance regulation) is through statutory accounting,” Grier said. Prudential is thought by analysts to be a candidate for a SIFI designation. It has “withstood the test of time, it doesn’t have pro-cyclical volatility,” he said.

Grier worried that with SIFI or G-SIFI designations, the industry would get two classes of companies, those with a halo and those without a halo.

“Shareholders may view that as punitive,” Grier said, noting the regime wasn’t set up for shareholders, of course.

Grier said it could create a crisis of a perceived flight to quality and distort the market.

McCarty and Vaughan agreed, in comments afterward.

You could get companies "branded as stronger,” the NAIC leadership said.

“What Mark [Grier] said was very important,” Vaughan said.” We are in a business that [can pay out] in 50 years. People put their money in and don’t expect t back right away. Consumers are really very interested in solvency, and financial strength is a competitive advantage,” Vaughan said.

The concern is that you create a system where consumers go to the perceived stronger companies disproportionately to real market risk, Vaughan and McCarty agreed.

Indeed, an actuary from one large insurer was at the conference listening, and said his company was trying to find out how it could stay off the SIFI list.

Vaughan said the response to the Federal Reserve has been to suggest that if regulators find non-insurance activities, “wall it off.” Make a “complete segregation, with...no loans, break it off. Or if you find it within the insurance company--reduce it,” Vaughan said.

Complicating matters, the International Association of Insurance Supervisors (IAIS) is working on designating what the U.S. industry calls, in short-hand, G-SIFIs, which may or may not correlate with the U.S. domestic SIFI list, although there is intensive work between the IAIS and the Federal Insurance Office (FIO), the NAIC, state regulators and others to coordinate approaches.

“Our approach should be consistent with the FSOC...We have constant dialogue between FSOC group and our group, I assume it will be a very consistent approach,” said the IAIS secretary general Yoshi Kawaii on a panel at the conference. “We work hard moving toward the same direction,” he said later in a press conference.

Meanwhile, company data collection continues from companies to the IAIS, with the state of Connecticut protecting the confidentiality of the flow-through of information to keep it confidential, and then erasing it after sending it onward.